Collect or Sell your debt

Business managers and owners are increasingly asking whether chasing up unpaid invoices might be best handled as a debt collection activity or better resolved by selling the uncollected debts off.

The term "collectors" is a descriptor which is widely misused within the media and by commentators outside of the debt collection industry and the business communities it serves. The misuse of the descriptor leads to confusion about who is being referred to and what services are actually being provided.

Most readers of this magazine understand the work of collectors is not restricted to third-party specialist businesses but also describes activities undertaken to some extent within most businesses: from the GP's wife working in the local surgery following up unpaid accounts through to the accounts receivables team in bigger businesses encouraging slower payers to pay outstanding invoices – this is all collections work.

Assuming you might wish to reach out for some assistance in collecting your debts or selling your debts, third-party collections businesses act for a range of clients involving government, commercial, utilities and consumer debts and have three offerings of collection services:

A. Contingent collections:Contingent collections is the mostly widely utilised form of debt collection activity in Australia and is when an original creditor refers debts to a debt collection business to collect on its behalf – collections are under a "principal and agent" agreement for an agreed fee (either as a percentage of the debts successfully recovered or as a flat fee per file or activity). The debt is owned at all times by the original creditor.

Contingent collections generally are used as the first approach by many businesses when considering their broader debt collection strategies.

B. Debt purchase collections:Debt buyers are involved in purchasing charged off or non-performing accounts being debts where the original creditor (typically banks, telecommunications providers and energy providers) has been unable to collect and where no further credit will be extended. The original creditor generally writes the debts off and assigns its rights to the debt buyer. This service is also referred to as purchase debt ledger collections, debt acquisition or portfolio collections.

Debts are typically sold by creditors on a forward flow arrangement (assignment to a debt purchaser once a debt falls into arrears, generally after 180 days) or alternatively as a parcel where defaulted debts over a set period are bundled together and sold. Debt sales are generally managed directly by the creditor or alternatively through brokers/intermediaries acting for a creditor.

C. Business Process Outsourcing (BPO)BPO which is commonly used in the banking, finance, telecommunications and energy sectors is also sometimes referred to as outsourced or first party collections and involves all activity being undertaken in the name of the creditor to whom the debt is owed.

Mostly, the collector providing BPO services links directly into its client's systems and closely follows the client's policies and procedures – in many respects the service provided is very similar to a labour hire arrangement.

The essential functions of contingent debt collectors and debt purchasers are exactly the same – the only differences between them relate to the ownership of the debts. This ownership or control of the debts is important as it means the debt purchaser determines the practices it will adopt when managing the debts.

Consumer debts from banks, telcos and energy providers make up a significant portion of the accounts contingent collectors handle and as well accounts relating to healthcare, education, government and commercial recoveries are also referred for contingent collections.

Consumer debts predominantly are the ledgers sold in Australia and although commercial debts can be sold they are very much in the minority of sale transactions.

Debt sales work well with consumer debts owed to banks, telcos and energy providers due to the homogeneous nature of those accounts which are sold off by way of an assignment agreement in large tranches.

With such consumer debts there is consistency in the documentation of the terms and conditions of each account. The original creditors have systems and processes for setting up the credit originally, for receipting monies and for selling off debts at a specific age of delinquency.

This same rigour does not always exist for commercial debts where often there is less scale and more fluidity in the systems creditors adopt when documenting and controlling the creation of credit. Further as commercial debts arise from the provision of goods and services there is opportunity for disagreement between the parties as to the quality or quantity of goods and/or services delivered and consequently a much higher risk of defended proceedings if legal action proves necessary to recover the outstanding account.

The requirements for a legal assignment or "assignment absolute" in respect to a debt sale can be summarised as:

There must be an assignment instrument in writing, signed by the assignorThe assignment must be an assignment absolute of the debt, not an equitable or conditional assignmentAlthough there is no particular form of assignment agreement, it must sufficiently indicate an intention on the part of the party entitled to receive the debt (the assignor) to immediately transfer title in and to the debt and the chose in action (the right of action to sue for recovery of the debt)There must be an express notice of assignment (NOA) in writing and also under the hand of the assignor sent to the debtor (an implied or constructive notice is not sufficient)

The NOA is intended to inform the debtor with certainty the entity in whom the legal right to recover the outstanding debt is now vested.

A debt assignment must be an absolute assignment to provide the debtor with certainty that when repaying the outstanding balance to the debt purchaser, a valid discharge will be obtained without having to seek recourse with the debt seller (i.e. the original creditor). An absolute assignment also protects the name and brand reputation of the debt seller in the event legal action is taken to recover an outstanding balance as the debt purchaser will take such legal proceedings in its own name.

At Australian Collectors & Debt Buyers Association we often receive calls from businesses looking to sell off their debts. More often than not, each caller has only one or no more than a handful of accounts and the history for non-payment varies but often includes disputes about the service or product provided or else are accounts where judgment is held but enforcement of the debt for recovery purposes has proven elusive.

The price paid for the accounts purchased from original creditors fluctuates and takes into account such factors as:

The age of the individual accountsThe face value of the individual accountsThe quality of the account documentation (terms and conditions)The extent of attempted collections by third party collection agenciesWhether the whereabouts of the debtors of each of the accounts are confirmedIn commercial debts the history of complaints about the goods and services provided

The debt purchaser acquires the ledger of accounts at a discount. The purchaser needs to locate each debtor and to then engage effectively to achieve a commitment to repay the delinquent account and even where legal recovery action is not required, may need to have the account in progress for an extended period to achieve full recovery.

The relocation of missing debtors is also a high risk for the debt purchaser – with 30% to 35% of debtors in consumer debts never relocated. Delays and risks to the recovery process are elevated too, if legal action is required.

If handling commercial debts, selling your debts might not be the easy option you imagine and instead recovery by way of the use of a contingent collections firm might still present the most cost efficient and accessible option for you.

Finally, remember that although contact from a debt collector is unlikely to ever feature on a consumer's list of favourite things, the actual process of debt collection is both legitimate and necessary to assist businesses to recover monies owed to them. On a more macro level, debt collection processes help to keep the balance in a credit-based economy and ultimately play a crucial and important part in maintaining access to credit for consumers.

*Alan Harries is the CEO of Australian Collectors & Debt Buyers Association and can be reached at akh@acdba.com

The term "collectors" is a descriptor which is widely misused within the media and by commentators outside of the debt collection industry and the business communities it serves. The misuse of the descriptor leads to confusion about who is being referred to and what services are actually being provided.

The essential functions of contingent debt collectors and debt purchasers are exactly the same – the only differences between them relate to the ownership of the debts.